Impact of Inflation on Chinas Economy

Impact of puffiness on Chinas EconomyChinese pretentiousness is insurrection too fast tho its had another major side effect. The Chinese economy is fast overheating. alone that extra liquidity is driving up prices and wages, while property determine charter so ard. In October, the official figures showed Chinas cost of living climbing by 4.4% year-on-year. That was the fastest increase in much than two years.And the situation whitethorn be rather worse than this. Two hebdomads ago a tyro at the Chinese Academy of Social Sciences, one of the governments top guess tanks, said that by its take calculations the countrys consumer price magnate had been understated by to a greater extent than 7% over the past five years. And in conclusion calendar week the original Dr Doom, Marc Faber, said he reckons the veridical Chinese puffiness localize is nearer 10% a year.Whatever the exact figures, theres no discredit lump is rising far too fast for comfort for the authorities. The Chinese central bank has been trying to cool things down gently.Five times this year its conjured bank reserve requirements, which reduces the amount that lenders can lend. stock-still the credit brakes are being tapped, not slammed, says the FT. The government could be more aggressive. In other words, so far the tightening hasnt had very much of an impact.The workforce is getting far stroppier than it once was. Between 2007 and 2008 the latest easy data wear upon disputes more than doubled. Food prices are already rising at 10% year-on-year. The Xinhua news agency reported last week that a basket of 18 staple vegetables cost 62% more during the first ten days of November than in the same period last year.So blueer wage hires are likely to become more frequent as most of the population lives close to the edge, says the FT. In fact, its functioning time to look like Chinas inflation problem has now got rather proscribed of hand.This article is talking ab stunned the inf lation occurring in China and the cost that it has brought to China. This inflation has baffled severe consequences to China and we ordain be discussing the possible solutionsinflationis a rise in the general aim of pricesof goods and services in aneconomyover a period of time. When the general price level rises, each unit of property buys fewer goods and services. Consequently, inflation also reflects an eating away in thepurchasing powerof money a loss of real value in the internal medium of exchange and unit of throwaway in the economy. A chief measure of price inflation is theinflation rate, the annualized percentage change in a generalprice index(normally theConsumer Price Index) over time.Costs of inflation in ChinaWhen inflation rates are high, groups such as pensioners, households, dependent on fond security benefits, stand lose to a great deal since they are often on fixed incomes. These Chinese forget now be able to purchase less than before (less purchasing power), and result start to demand for higher wages. Only those with strong bargaining positions leave alone be able to bid up for higher wages. In addition, people will be able to buy less food items than before which is a major issue because food is one of the basic necessities in valet life, as in the article it has shown the the prices of food increase 10% year-to-year.Inflation causes an increase in interest rates and will therefore keep up a banish effect on investment and output, both of which will adversely affect employment, as in the article we can pay heed that labour disputes have been doubled high inflation delegacy that the businesses in China will have to change their prices to keep up to realise on the price level.Inflation affects the foreign trade and the exchange rate. Experiencing high rates of inflation, Chinas domestic products will be less competitive internationally. As the domestic products prices increase the demand for these products will fall and therefo re the demand for Chinas currency will also fall, thus affecting the exchange rate.The cause of inflation in ChinaThe cause of inflation in Chinas economy was expansionary monetary policies and rising wages. The inflation in China was caused by cost-push inflation. It means that the cost of firms increase, in this case it is higher wages, and the firms are forced to raise prices inorder to cover the costs.Cost-push inflationIf the economy demands higher wages, the higher costs of labour will shift the SRAS curve to the left from SRAS1 to SRAS2. The price level rises from P1 to P2. Higher wages increase consumption and therefore increases aggregate demand from AD0 to AD1. The change magnitude spending (and possible expansionary policies) move the economy towards equilibrium at Yfe scarcely at a higher price level. We have now a round of cost-push inflation.SolutionIn the article, it has shown that Chinas government is trying its best to distract this issue but it has been said tha t it hasnt had much of an impact.One of the possible shipway of reducing inflation is by subsidizing businesses. The government can give out subsidies to business so that the businesses can reduce their costs of production. This will therefore encourage the businesses to lower their prices and thus avoiding inflation. The problem here is that the government will suffer a huge loss if there are some(prenominal) businesses to subsidize.Another possible solution is by appreciating its currency. This is because if it appreciates its currency then firms will be able to buy cheaper raw materials and therefore will have lower costs of production. Thus reducing prices of goods. It can appreciate its currency by using its foreign currency reserves to buy its own currency and this will increase the demand for its currency. Even though this mode will help businesses to reduce their prices, there are also negative consequences.